Shifting sands in property development

SINCE the tabling of the 13th Malaysia Plan (13MP), the property sector has been in the news for the wrong reasons, with two key proposals expected to be game changers for the market.

First, under the 13MP, the government has proposed replacing the current sell-then-build (STB) model with the build-then-sell (BTS) concept, which will alter the market’s demand and supply equilibrium.

Second, the proposed Urban Renewal Bill was tabled in Parliament, which may have a significant impact on how redevelopment takes place, especially in major cities.

From STB to BTS

Under the 13MP, the key strategies proposed include raising the supply of quality, liveable and inclusive housing, boosting home ownership, and greater regulatory and housing management effectiveness.

It was further elaborated that under the BTS concept, the government intends to amend the Housing Development Act (Licensing and Control), 1966 (Act 118), by introducing a mandatory risk-sharing formula.

This is to address the issue of abandoned housing projects and make developers more accountable.

Based on the current STB concept, developers have it “easy” in terms of housing development, as much of the project cost is funded by buyers through progress payments based on the percentage of project completion.

Developers also contribute equity via the project development company, typically a special-purpose vehicle set up for the project, with the remaining funds coming from financial institutions.

Typically, developers provide approximately 20% to 30% of the project funding, with the rest split between home buyers’ progress payments and financing from financial institutions.

A housing developer gets into trouble when a newly launched project is unsellable in the market, tightening the developer’s finances and hindering their ability to fund subsequent stages, which leads to difficulties.

For outsiders, the property market has often been seen as an easy sector to get into, as seen by the number of listed and unlisted companies venturing in hopes of striking it rich.

However, market dynamics have changed over the past 12 to 15 years.

The unprecedented growth in home prices has slowed down considerably, while government interventions – via amendments to regulations on developers’ interest-bearing schemes and changes to legislations like the real property gains tax – have made conditions tougher on developers and homebuyers.

At present, among the 100 listed property companies, 20% have market capitalisations in excess of RM1bil, another 16% fall between RM500mil and RM1bil, and 40% range between RM100mil and RM500mil.

Even among these listed companies, not many are financially healthy enough to rely on their balance sheets for development projects under the STB concept.

Developers would have to fund 50% to 70% of any development themselves, as homebuyers are only likely obliged to pay the mandatory 10% upon signing the sales and purchase agreement, with the balance upon delivery of vacant possession.

This would also mean that should BTS be mandated, it is likely the developers will increase home prices as they will bear the full cost of funding development.

This could lead to the future scale of development likely to be less grandiose in terms of total gross development value.

Of course, under the present STB regime, buyers who depend on financing also bear the additional interest costs on loans already disbursed.

Feasibility studies

As the government is prepared to amend Act 118, it is also perhaps an opportune time to introduce a compulsory and independent Feasibility Studies & Financial Standing Report, carried out by a licensed valuer, which must be presented to the relevant local council before a project is approved.

This feasibility study must incorporate discounted cash flow analysis supported by market demand and supply analysis, competitor analysis, market commentary, and demographic composition of the area where the property is located.

It must also include a breakeven analysis, sensitivity analysis, and scenario analysis, as well as a strength, weakness, opportunity, and threat analysis.

The report should also be made compulsory by banks before approving project financing.

In this way, the local authorities will be able to assess whether the project is viable or otherwise, and determine whether the developer has the financial muscle to complete it.

Surely, any newbie entering the property market too should be dismissed as they do not have the market experience or expertise to be in the sector, especially under the BTS concept.

URA – devil is in the details

If passed, the Urban Renewal Act (URA) will be the cornerstone of the nation’s redevelopment efforts, especially for older and dilapidated buildings.

However, the real question is, how did we get here, as we are talking about buildings that are relatively “young”, and this is really about the quality of buildings being built, as well as our maintenance culture.

In Western countries, there are many old buildings, but they remain well-kept and liveable.

While one can understand the need for URA to address truly dilapidated buildings, it is important that fair compensation is paid is provided to affected parties.

The current threshold of 80% consent should be raised to at least 85% or 90%.

To ensure fairness, valuations must be conducted by at least two or three independent valuers, including one from the government.

This approach is similar to the rules governing listed companies, where an offeror can only take a company private if they acquire at least 90% of shares not already owned in a takeover offer.

The appointment of an approved developer for urban renewal must be transparent and carried out via an open tender process.

Developers must demonstrate their ability to deliver projects backed by sufficient financial resources, experience, and execution capacity, as failure to do so will only bring us back to square one.

Moreover, developers undertaking urban renewal must ensure that affected families can remain within their current locality, preserving their access to workplaces, schools, nursing homes, and kindergartens.

This is essential to avoid disrupting their daily routines and logistical arrangements.

Ultimately, the proposed bill must be a win-win for all – not just developers eager to reap the profits of prime land located within the city centre.

The government’s role in setting clear guidelines and enforcing strict oversight is critical to prevent the displacement of affected families both during and after redevelopment.

Given the shifting dynamics, the property sector is seen to face strong headwinds.

It is likely that only the financially strong developers capable of delivering high-quality projects on time will thrive.